Seth Frotman has tough words for CFPB’s political leadership, and big ideas on how to solve the student-debt crisis.

March 7, 2019

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When the House Financial Services Committee meets Thursday to conduct its first oversight hearing of the Consumer Financial Protection Bureau since Democrats took control of the committee, Seth Frotman will be sitting at the witness table.

There’s an alternate universe where Frotman would be testifying as the CFPB’s student-loan ombudsman and the top federal official overseeing the entire student-loan market. He held that role beginning in 2016—but resigned last summer and wrote a dramatic letter to then–CFPB Director Mick Mulvaney (now President Trump’s acting chief of staff) charging the bureau had “abandoned the very consumers it is tasked by Congress with protecting” in order to “serve the wishes of the most powerful financial companies in America.”

Instead, Frotman will appear Thursday as head of the Student Borrower Protection Center, a group he launched last fall after leaving government. It operates almost as a shadow, nonprofit-sector CFPB, with several former bureau officials among its staffers. The group aims to protect student borrowers from the predations of the financial sector by urging state and local officials to crack down on lenders, and by doing research and pushing lawmakers to end the student-debt crisis. Frotman will highlight the group’s work in his testimony Thursday—and unleash strong criticisms of the place where he used to hold a top job.

“It is kind of strange, I’ll give you that,” Frotman told me by phone from a hotel in Massachusetts on Wednesday, where he was attending the unveiling of a bill that would create a student-loan ombudsman at the state level. “I think that there was some hope that issues around student debt and consumer protection could actually have been a place for agreement, because this is an issue that shouldn’t be partisan,” he said. “It is disheartening because I wish it could have gone another way, because I loved my job.”

In his opening statement, Frotman will have harsh words for Mulvaney and the new CFPB director, Kathy Kraninger, who will also testify. “The last 15 months at the bureau have been plagued with inaction and incompetence, all under the guise of some supposed ideology. The political leadership has engaged in costly vanity exercises, while real people are getting hurt,” Frotman will say, pointing to several instances where political appointees at the CFPB interfered with the work of career staff, sat on bureau findings, and withdrew planned rulemaking efforts that would have protected student borrowers.

Nearly 45 million Americans hold student debt, which totals $1.5 trillion. That’s larger than the GDP of 200 countries, and is the second-highest class of debt in America, ahead of both credit cards and auto loans. Eight million borrowers are in default, and another 5 million are behind on their loans.

Frotman feels those millions of borrowers have no real voice in Washington—certainly not in the regulatory agencies under Trump, but not really in the think-tank and advocacy world either, which even on the left is more focused on eliminating or reducing tuition rates for future students. That’s where he sees his new group, the Student Borrower Protection Center, stepping in. “What makes us unique is the sole focus on borrowers’ existing student debt,” he said. “We can’t just write off an entire generation of people to what is essentially a trillion-dollar failed social experiment.”

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Those are somewhat wild-eyed words for a career government lawyer and bureaucrat. (Frotman worked in Congress before spending seven years at the CFPB in various roles.) But these days, Frotman is open to radical solutions to the student-loan crisis—including just canceling some or all of the debt outright. That’s a position that even the 2020 candidates racing to prove their lefty bona fides have not yet embraced, instead preferring to talk about tuition or debt-free college plans. (Senator Elizabeth Warren has at least hinted that revenue from her recently unveiled wealth tax could be used for some form of student-loan relief.)

“I have traveled the country and I know that the number-one way to disappoint—to infuriate—someone with student debt is when a politician addresses their struggle by talking about how they’re going to make college free for the next guy,” Frotman said.

He pointed to two proposals as possible models: one, a Levy Institute paper from Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum that looked at how the federal government could just zero out all existing student-loan debt: it would simply write off the debt held by federal government entities (which is a majority of existing student loans) and then assume payments from borrowers who owe money a private lender. The authors found such a policy would increase annual GDP by $86 to $108 billion per year and reduce the unemployment rate by boosting the demand for labor.

The other proposal comes from Demos and the Institute for Assets & Social Policy at Brandeis University, and advocates for a means-tested elimination of student debt for middle- and low-income families only. The authors of that report believe that blanket forgiveness of all student debt would actually increase the racial wealth gap; white families would see a greater benefit because of a higher rate of completion of college and graduate-degree programs. But eliminating student debt for households making $50,000 or less would reduce the black-white wealth disparity by nearly 37 percent among low-wealth households, according to the study.

Frotman didn’t take a position on which approach is right, but said, “This needs to be on the table. We need elected officials, we need think tanks, we need advocacy groups laying out plans and their rationale about how we help student-loan borrowers.”

The more immediate concern—and the main focus of Thursday’s hearing—will be the blind eye the CFPB has turned towards the student-loan industry. The bureau has taken no major action against student-loan servicers since Richard Cordray resigned as director in 2017, and that has exposed millions of borrowers to potential abuse. And Frotman will make his outrage about this clear.

“They’re hurting real people,” Frotman said Wednesday. “This isn’t a game. This isn’t some debate club. Their actions have real consequences on the lives of hundreds of millions of Americans, including tens of millions of Americans with student debt. They are failing at the job miserably.”